<PAGE>

--------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------
                                    FORM 10-Q

                                   (MARK ONE)

     [X]   QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008


     [ ]        TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM         TO

                        COMMISSION FILE NUMBER 000-12950
                        --------------------------------

                          ALLIANCE PHARMACEUTICAL CORP.
             (Exact Name of Registrant as Specified in Its Charter)

                NEW YORK                                 14-1644018
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

       7590 FAY AVENUE, SUITE 402                          92037
          LA JOLLA, CALIFORNIA
(Address of Principal Executive Offices)                 (Zip Code)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING ARE CODE: (858) 410-5200

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definition of "large accelerated filer," "accelerated file" and
"smaller reporting company" in rule 12b-2 of the Exchange Act.

<TABLE>
<S>     <C>
Large accelerated filer [ ]  Accelerated filer [ ]    Non-accelerated filer [ ]    Smaller reporting company |X|
                                                     (Do not check if a smaller
                                                          reporting company)
</TABLE>

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

         Common Stock, $0.01 par value per share, 150,000,000 shares authorized,
63,216,247 shares issued and outstanding at February 11, 2009.

<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------


<TABLE>
<S>     <C>
INDEX
-----
                                                                                        Page No.
                                                                                        --------
PART I - FINANCIAL INFORMATION

Item 1.       Financial Statements

              Condensed Consolidated Balance Sheets at December 31, 2008 (unaudited)
              and June 30, 2008                                                             3

              Condensed Consolidated Statements of Operations (unaudited)                   4

              Condensed Consolidated Statements of Cash Flows (unaudited)                   5

              Notes to Unaudited Condensed Consolidated Financial Statements                6



Item 2.       Management's Discussion and Analysis of Financial Condition and
              Results of Operations                                                        15



Item 4T.      Controls and Procedures                                                      20



PART II - OTHER INFORMATION

Item 1.       Legal Proceedings                                                            20

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds                  20

Item 3.       Defaults Upon Senior Securities                                              21

Item 4.       Submission of Matters to a Vote of Security Holders                          21

Item 5        Other Information                                                            21

Item 6.       Exhibits                                                                     21

</TABLE>


                                      -2-
<PAGE>

PART I FINANCIAL INFORMATION:
Item 1.  Financial Statements

<TABLE>
<S>     <C>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------


                                                           DECEMBER 31, 2008  JUNE 30, 2008
                                                             -------------    -------------
ASSETS                                                        (UNAUDITED)       (AUDITED)
------
CURRENT ASSETS:
    Cash                                                     $       1,000    $       6,000
    Restricted cash                                                     --           16,000
    Other current assets                                            18,000           39,000
                                                             -------------    -------------
          Total current assets                                      19,000           61,000

PROPERTY AND EQUIPMENT - NET                                        51,000           87,000
                                                             -------------    -------------
                                                             $      70,000    $     148,000
                                                             =============    =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                         $     333,000    $     252,000
    Accrued expenses                                               377,000          212,000
    Deferred revenue                                               100,000          100,000
    Advance from related party                                      90,000               --
    Senior notes payable and accrued interest                   10,952,000       11,065,000
                                                             -------------    -------------
          Total current liabilities                             11,852,000       11,629,000

OTHER LIABILITIES                                                  750,000          750,000
                                                             -------------    -------------
          Total liabilities                                     12,602,000       12,379,000
                                                             -------------    -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
    Common stock - $0.01 par value; 150,000,000 shares
       authorized; 63,216,247 and 60,216,247 shares issued
       and outstanding, respectively                               632,000          602,000
    Additional paid-in capital                                 487,253,000      486,760,000
    Accumulated deficit                                       (500,417,000)    (499,593,000)
                                                             -------------    -------------
          Total stockholders' deficit                          (12,532,000)     (12,231,000)
                                                             -------------    -------------
                                                             $      70,000    $     148,000
                                                             =============    =============


    SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                      -3-
<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------

                                                 THREE MONTHS ENDED                             SIX MONTHS ENDED
                                                     DECEMBER 31,                                 DECEMBER 31,
                                              2008                  2007                  2008                 2007
                                       ------------------    ------------------    ------------------    ------------------
                                                      (UNAUDITED)                                 (UNAUDITED)
REVENUES:
   Royalty, license and research       $               --    $               --    $               --    $           57,000
                                       ------------------    ------------------    ------------------    ------------------

OPERATING EXPENSES:
   Research and development                       102,000                91,000                92,000               260,000
   General and administrative                     178,000               194,000               369,000               491,000
                                       ------------------    ------------------    ------------------    ------------------
                                                  280,000               285,000               461,000               751,000
                                       ------------------    ------------------    ------------------    ------------------
LOSS FROM OPERATIONS                             (280,000)             (285,000)             (461,000)             (694,000)

INVESTMENT INCOME                                   1,000                 4,000                 1,000                14,000
OTHER INCOME                                           --                    --                25,000               163,000
INTEREST EXPENSE                                 (192,000)             (222,000)             (397,000)             (465,000)
LOSS ON MODIFICATION OF DEBT                           --                    --                    --               (14,000)
LOSS ON DISPOSITION OF EQUIPMENT                       --                    --               (17,000)                   --
GAIN ON DISPOSITION OF ASSETS                          --                    --                25,000                    --
                                       ------------------    ------------------    ------------------    ------------------
NET LOSS                               $         (471,000)   $         (503,000)   $         (824,000)   $         (996,000)
                                       ==================    ==================    ==================    ==================

NET LOSS PER COMMON SHARE,
   BASIC AND DILUTED                   $            (0.01)   $            (0.01)   $            (0.01)   $            (0.02)
                                       ==================    ==================    ==================    ==================

WEIGHTED AVERAGE SHARES OUTSTANDING,
   BASIC AND DILUTED                           62,531,000            55,156,000            61,380,000            52,236,000
                                       ==================    ==================    ==================    ==================

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                      -4-
<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------

                                                            Six Months Ended December 31,
                                                                2008           2007
                                                             -----------    -----------
                                                                    (UNAUDITED)
OPERATING ACTIVITIES:
    Net loss                                                 $  (824,000)   $  (996,000)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
           Depreciation and amortization                          18,000         19,000
           Loss on modification of debt                               --         14,000
           Accrued interest on senior notes                      397,000        465,000
           Stock-based compensation                               14,000         24,000
           Loss on disposal of equipment                          17,000             --
           Changes in operating assets and liabilities:
              Other assets                                        38,000        (35,000)
              Accounts payable, accrued expenses and other       245,000       (228,000)
                                                             -----------    -----------
Net cash used in operating activities                            (95,000)      (737,000)
                                                             -----------    -----------


FINANCING ACTIVITIES:
    Advance from related party                                    90,000             --
                                                             -----------    -----------
Net cash provided by financing activities                         90,000             --

DECREASE IN CASH                                                  (5,000)      (737,000)
CASH AT BEGINNING OF PERIOD                                        6,000        873,000
                                                             -----------    -----------
CASH AT END OF PERIOD                                        $     1,000    $   136,000
                                                             ===========    ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
    Issuance of common stock upon conversion of senior
      notes and interest                                     $   510,000    $ 2,173,000
                                                             ===========    ===========


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>


                                      -5-
<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                  THREE AND SIX MONTHS ENDED DECEMBER 31, 2008

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
------------

         Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company," "Alliance," "we" or "us") are engaged in identifying, designing and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients.

LIQUIDITY AND BASIS OF PRESENTATION
-----------------------------------

         The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through December 31, 2008 and has negative working capital at
that date of approximately $11.8 million. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.

         As discussed in Note 3, in June 2004, the Company completed a private
placement financing with net proceeds to the Company of approximately $10
million from the sale of common stock (the "June 2004 Private Placement"). In
September 2004, the terms of the June 2004 Private Placement were renegotiated
by mutual agreement of the Company and investors holding approximately $10.7
million of the original $11 million invested by the various investors in the
June 2004 Private Placement. Concurrently, the investors who elected to rescind
the June 2004 Private Placement were issued senior convertible promissory notes
in like investment amounts (the "Senior Notes"), which, unless previously
converted, were to mature and the unpaid principal, together with accrued
interest, was to become due and payable on April 1, 2007. The Company requested
that each holder of a Senior Note execute an amendment to extend the maturity
date of the Senior Note from April 1, 2007 to June 30, 2008 under certain
conditions, which we did not meet in a timely manner. This amendment was
approved by substantially all of the Senior Note holders. The Company is now in
default under the Senior Notes. The Company is continuing to seek additional
financing of approximately $3 million to fund its continuing operations through
June 2011 (see Note 5). We have not yet identified a source of the funds and it
is uncertain if we will be able to do so. Failure to obtain such financing would
likely result in the liquidation of our Company. It is unlikely that our
shareholders would receive any of the proceeds from such liquidation. Because
adequate funds have not been available to the Company in the past, the Company
has already delayed its OXYGENT development efforts and has delayed, scaled
back, and/or eliminated one or more of its other product development programs.
The accompanying unaudited condensed consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

PRINCIPLES OF CONSOLIDATION
---------------------------

         The accompanying unaudited condensed consolidated financial statements
include the accounts of Alliance Pharmaceutical Corp., the accounts of its
wholly owned subsidiary, Molecular Biosystems, Inc. ("MBI"), and its
majority-owned subsidiaries, Talco Pharmaceutical, Inc. and PFC Therapeutics,
LLC ("PFC Therapeutics"). All significant intercompany accounts and transactions
have been eliminated.

INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------

         The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America for interim financial
information. These principles are consistent in all material respects with those
applied in the Company's consolidated financial statements contained in the
Company's annual report on Form 10-KSB for the fiscal year ended June 30, 2008,
and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC"). Interim
financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of


                                      -6-
<PAGE>

America for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (all of which are of a normal recurring nature, including the
elimination of intercompany accounts) necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
indicated. Interim results of operations are not necessarily indicative of the
results to be expected for the full year or any other interim periods. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
contained in the Company's annual report on Form 10-KSB for the year ended June
30, 2008.

USE OF ESTIMATES
----------------

         The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the condensed consolidated
financial statements. Significant estimates made by management include, among
others, recoverability of property and equipment and the valuation of deferred
tax assets and stock options. Actual results could differ from these estimates.

PROPERTY AND EQUIPMENT
----------------------

         Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years. Major betterments and renewals are capitalized, while
routine repairs and maintenance are charged to expense when incurred.

         The Company assesses the recoverability of property and equipment by
determining whether such assets can be recovered through projected undiscounted
cash flows. The amount of impairment, if any, is measured based on fair value
and is charged to operations in the period in which impairment is determined by
management. At December 31, 2008, management has determined that there is no
impairment of property and equipment. There can be no assurance, however, that
market conditions will not change, which could result in future property and
equipment impairment.

REVENUE RECOGNITION
-------------------

         The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," as
revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, or services have
been performed, the price is fixed or readily determinable and collectibility is
probable.

         Revenue is deferred until all contractual obligations have been
satisfied.

         RESEARCH AND DEVELOPMENT REVENUES UNDER COLLABORATIVE AGREEMENTS
         ----------------------------------------------------------------

         Research and development revenues under collaborative agreements are
recognized as the related expenses are incurred, up to contractual limits.
Payments received under these agreements that are related to future performance
are deferred and recorded as revenue as they are earned over the specified
future performance period. Revenue related to nonrefundable, upfront fees are
recognized over the period of the contractual arrangements as performance
obligations related to the services to be provided have been satisfied. Revenue
related to milestones is recognized upon completion of each milestone's
performance requirement.

         LICENSING AND ROYALTY REVENUES
         ------------------------------

         Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.


                                      -7-
<PAGE>

         RAW MATERIAL REVENUES
         ---------------------

         The Company recognizes revenues from the sales of raw material upon
shipment, at which time title transfers and the Company has no further
obligation. Such sales in the amount of $25,000 and $163,000 were recorded
during the six months ended December 31, 2008 and December 31, 2007,
respectively, in connection with raw material that the Company does not market.
Inventory associated with the sales of these raw materials is carried at zero
value. The amounts earned for these sales were recorded as other income in the
accompanying condensed consolidated statements of operations.

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

         Research and development expenditures are charged to expense as
incurred. Research and development expenditures include the cost of salaries and
benefits for clinical, scientific, manufacturing, engineering and operations
personnel, payments to outside researchers for preclinical and clinical trials
and other product development work, payments related to facility lease and
utility expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the six-month periods ended December 31, 2008 and 2007, the
Company incurred research and development expenses of approximately $92,000 and
$260,000, respectively. The research and development costs for the current
period are primarily costs associated with filing a new patent in certain
countries.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

         The carrying amount of certain of the Company's financial instruments
as of December 31, 2008 approximates their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash,
accounts payable, accrued expenses and other liabilities. The carrying value of
debt approximates fair value as the related interest rate approximates a rate
currently available to the Company.

COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
-------------------------------------------------

         Basic loss per share was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. All
potential dilutive common shares have been excluded from the calculation of
diluted loss per share for the six months ended December 31, 2008 and 2007, as
their inclusion would be anti-dilutive. The outstanding potentially dilutive
common shares totaled approximately 64,424,000 and 63,317,000 at December 31,
2008 and 2007, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------

         At December 31, 2008, the Company has two stock-based employee
compensation plans.

         Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R)") requires companies to estimate
the fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods in
the Company's consolidated statement of operations.

         Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company's condensed consolidated statement of operations for the six
months ended December 31, 2008 included compensation expense for share-based
payment awards granted prior to, but not yet vested as of June 30, 2006, based
on the grant date fair value estimated in accordance with the pro forma
provisions of SFAS No. 123 and compensation expense for the share-based payment
awards granted subsequent to June 30, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R). As stock-based
compensation expense recognized in the condensed consolidated statement of
operations for the six months ended December 31, 2008 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS
No. 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The estimated average forfeiture rate was based on historical
forfeiture experience and estimated future employee forfeitures.

         SFAS No. 123(R) requires cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash flows. Due to the Company's
loss position, there were no such tax benefits during the six months ended
December 31, 2008.

                                      -8-
<PAGE>

DESCRIPTION OF PLANS
--------------------

         The Company's stock option plans provide for grants of options to
employees and directors of the Company to purchase the Company's shares, as
determined by management and the board of directors, at the fair value of such
shares on the grant date. The options generally vest over a four- to five-year
period beginning on the date of grant or up to one year after the date of grant
and have a ten-year term. As of December 31, 2008, the Company is authorized to
issue up to 8,100,000 shares under these plans and has 4,102,110 shares
available for future issuance.

SUMMARY OF ASSUMPTIONS AND ACTIVITY
-----------------------------------

         The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes option pricing model, even though the model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions regarding future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S. Treasury rate that corresponds
to the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of our common stock.
These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods.

         A summary of option activity as of December 31, 2008 and changes during
the six months then ended is presented below:

<TABLE>
<S> <C>
                                                                            12/31/2008
                                                         ---------------------------------------------
                                                                         WEIGHTED-AVERAGE
                                                                         ----------------
                                                                                  REMAINING
                                                                                 CONTRACTUAL  AGGREGATE
                                                                       EXERCISE     TERM      INTRINSIC
                                                          SHARES        PRICE      (YEARS)     VALUE
                                                         ---------------------------------------------
Options outstanding at July 1, 2008                       2,703,800    $  3.49         5.84
Options granted                                                  --
Options forfeited/expired                                   (58,100)
Options exercised                                                --
                                                         ---------------------
Options outstanding at December 31, 2008                  2,645,700    $  3.03         5.46   $     --
                                                         ---------------------------------------------
Unvested options expected to vest at December 31, 2008      465,500    $  0.23         6.32   $     --
                                                         ---------------------------------------------
Options exercisable at December 31, 2008                  2,170,700    $  3.64         5.27   $     --
                                                         =============================================
</TABLE>

         There were 58,100 options that expired from an expired plan during the
six months ended December 31, 2008. There IC OMITTED][GRAPHIC OMITTED] were no
options granted or exercised during the six months ended December 31, 2008. Upon
the exercise of options, the Company issues new shares from its authorized
shares.

         As of December 31, 2008, there was approximately $26,000 of total
unrecognized compensation costs related to employee and director stock option
compensation arrangements. That cost is expected to be recognized on a
straight-line basis over the next four years on average. The total fair value of
shares vested during the six months ended December 31, 2008 related to employee
and director options and options issued to consultants was approximately $13,000
and $1,000 respectively, net of estimated forfeitures.

         The Company allocated $13,000 of the stock-based compensation expense
related to employee and director stock options to general and administrative
expenses and $1,000 of the stock-based compensation expense related to
consultant stock options to research and development expenses.


                                      -9-
<PAGE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

         In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE
MEASUREMENTS." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principals generally accepted in the U.S. and
expands disclosures about fair value measurements. The statement does not
require new fair value measurements, but is applied to the extent that other
accounting pronouncements require or permit fair value measurements. SFAS No.
157 emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies that have assets and liabilities
measured at fair value will be required to disclose information that enables the
users of its financial statements to access the inputs used to develop those
measurements. The reporting entity is encouraged, but not required, to combine
the fair value information disclosed under this statement with the fair value
information disclosed under other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. In February 2008,
the FASB issued FSP 157-2, "EFFECTIVE DATE OF FASB STATEMENT NO. 157", which
delays the effective date of SFAS No. 157 for non-financial assets and
liabilities to fiscal years beginning after November 15, 2008. On July 1, 2008,
the Company adopted SFAS No. 157 for financial assets and liabilities. The
adoption did not have a material effect on the Company's results of operations
and financial position. The Company is in the process of evaluating the impact
of adoption of SFAS No. 157 for non-financial assets and liabilities, but does
not anticipate that the adoption will have a material impact on its condensed
consolidated financial statements.

         In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES." SFAS No. 159 permits entities
to choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. SFAS No. 159 does
not establish requirements for recognizing and measuring dividend income,
interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007. The Company adopted
SFAS No. 159 on July 1, 2008. The adoption did not have a material effect on the
Company's results of operations and financial position.

         In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS
COMBINATIONS" ("SFAS No. 141(R)"). SFAS No. 141(R) requires acquiring entities
in a business combination to recognize the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors the information they need to
evaluate and understand the nature and financial effect of the business
combination. SFAS No. 141(R) is effective in fiscal years beginning after
December 15, 2008. The Company expects to adopt SFAS No. 141(R) on July 1, 2009.
The Company is currently assessing the impact the adoption of SFAS No. 141(R)
will have on its consolidated financial statements.

         In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING
INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS" ("SFAS No. 160"). SFAS No. 160
requires entities to report noncontrolling (minority) interests in subsidiaries
as equity in the consolidated financial statements. SFAS No. 160 is effective in
fiscal years beginning after December 15, 2008. The Company expects to adopt
SFAS No. 160 on July 1, 2009. The Company is currently assessing the impact the
adoption of SFAS No. 160 will have on its consolidated financial statements.

         In June 2008, the FASB ratified EITF No. 07-5, "DETERMINING WHETHER AN
INSTRUMENT (OR EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK," ("EITF
07-5"). EITF 07-5 provides guidance for determining whether an equity-linked
financial instrument, or embedded feature, is indexed to an entity's own stock.
EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years, and will be adopted by the Company in
the first quarter of fiscal year 2010. The Company is currently assessing the
potential impact, if any, of the adoption of EITF 07-5 on its consolidated
results of operations and financial condition.


                                      -10-
<PAGE>

2.  PFC THERAPEUTICS, LLC

         On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one
of the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, will include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, the Company received the non-refundable portion of an exclusivity fee of
$100,000 per the terms of the LEO Exclusivity Agreement. Because the amendment
discussed below extends LEO's due diligence time-period, this amount has been
deferred and is included in current liabilities in the accompanying consolidated
balance sheet at June 30, 2008.

         On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by us to LEO of the results of a Phase 2b
postoperative ileus study. The postoperative ileus endpoints will be
incorporated in the Phase 2 clinical study described below. The remaining terms
of the LEO Exclusivity Agreement remain in full force and effect.

         On May 13, 2005, PFC Therapeutics and Beijing Double-Crane
Pharmaceutical Co., Ltd. ("Double-Crane"), the market leader for IV solutions
and one of the largest pharmaceutical companies in the People's Republic of
China (the "PRC"), entered into a development, license and supply agreement
("Double-Crane Agreement") for the development of OXYGENT in the PRC. Pursuant
to the Double-Crane Agreement, Double-Crane made an upfront license fee payment
and will make certain milestone and royalty payments to the Company. The upfront
license fee of $500,000 was deferred until the Company's obligations to perform
were satisfied. These obligations included the transfer and translation of all
intellectual property, preclinical, clinical and regulatory data necessary for
Double-Crane's clinical development and Investigational New Drug ("IND")
application to the State Food and Drug Administration PRC (the "sFDA"). This
transfer and all other corresponding obligations were completed and such amount
was recognized as license revenue at June 30, 2007.

         Double-Crane intends to pursue an intraoperative and postoperative
transfusion avoidance endpoint. Double-Crane's clinical development plan
incorporates a new protocol design that is intended to build on the previously
conducted Alliance Phase 2 and Phase 3 clinical trials. In these studies, the
efficacy of OXYGENT in terms of drug activity (i.e., its ability to deliver
oxygen) enabled patients to remain physiologically stable at lower
intraoperative hemoglobin ("Hb") levels. OXYGENT was shown to be statistically
better than blood in reversing, as well as maintaining reversal of,
physiological transfusion triggers. Importantly, the Double-Crane study will not
employ any blood harvesting techniques (i.e., acute normovolemic hemodilution or
intraoperative autologous donation), which were implicated in safety issues in a
previous Alliance Phase 3 clinical trial.

         Double-Crane is obligated pursuant to its agreement with Alliance to
conduct clinical trials in the PRC in accordance with the International
Conference on Harmonization of Technical Requirements for Registration of
Pharmaceuticals for Human Use (the "ICH") Guidelines, which would allow Alliance
to use any data derived from the clinical trials in other countries.

         Double-Crane will have the option to manufacture OXYGENT in the PRC
after obtaining approval from the regulatory authorities in the PRC and they
will also have a right of first refusal to add specific additional countries to
the Double-Crane Agreement upon further negotiation with the Company.

3.  DEBT OBLIGATIONS

SENIOR NOTES PAYABLE
--------------------

         On July 2, 2004, Nycomed Denmark ApS ("Nycomed") notified the Company
that it was unilaterally terminating its Development, Assignment and Supply
Agreement (the "Nycomed Agreement") effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement. After considering all of the facts and
circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's shareholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement.


                                      -11-
<PAGE>

         On September 24, 2004, investors holding 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement elected to rescind the June 2004 Private Placement. In doing so, each
of these investors returned to the Company its stock certificate representing
the number of shares and the warrant that it received in the June 2004 Private
Placement for cancellation. Immediately thereafter, these same investors entered
into the Senior Note Purchase Agreement whereby the Company issued to such
investors Senior Notes convertible into common stock at $0.25 per share, which
was subsequently amended (see below), in principal amounts equal to the amounts
such investors invested in the June 2004 Private Placement.

         After giving effect to both transactions, the Company issued 880,714
shares of common stock and warrants to purchase 660,536 shares of common stock
in the June 2004 Private Placement, and the Company issued Senior Notes in an
aggregate principal amount of approximately $10.7 million.

         The Senior Notes were due March 24, 2006, and bore interest at 6% per
annum. In April 2006, the Company entered into the 2006 Amendment with each of
the existing holders of Alliance's Senior Notes. Pursuant to the 2006 Amendment,
the maturity date of each outstanding Senior Note was extended from March 24,
2006 to April 1, 2007. The conversion price of each Senior Note was reduced from
$0.25 to $0.17, and the interest that accrued on each Senior Note from March 25,
2006 through April 1, 2007 was increased from 6% to 10% per annum. In addition
to the amounts due under the Senior Notes, the holders of the Senior Notes were
entitled to receive up to an aggregate of $11.4 million in payments based on
future royalties from OXYGENT product sales (or under certain conditions from
milestone payments) payable at a rate equal to 50% of such payments Alliance
actually receives.

         On May 15, 2007, Alliance entered into an amendment (the "2007
Amendment") of its Senior Convertible Promissory Note Purchase Agreement and
Registration Rights Agreement (as amended by the 2006 Amendment) with
essentially all of the existing holders of the Senior Notes. Pursuant to the
2007 Amendment, the maturity date of each outstanding Senior Note was extended
as follows:

         (a) The maturity date was extended from April 1, 2007 to the date
ninety (90) days after the date of the 2007 Amendment. If the Company received
more than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

         (b) If the Company received at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date would
automatically become June 30, 2008.

         The holders of the Senior Notes also agreed to subordinate their rights
to any debt that is issued in a Qualified Financing. Further, any financing that
qualified as a Qualified Financing would not require additional approval from
the Senior Note holders.

         Alliance also agreed to issue to each current holder of a Senior Note
an additional note with principal amount equal to 20% of the outstanding
principal amount of such Senior Note on the date of the 2007 Amendment, which
resulted in Alliance issuing new promissory notes in the aggregate principal
amount of approximately $1.8 million. These new notes bear interest at the rate
of 10% per annum, matured on June 30, 2008 and are convertible into common stock
of Alliance on the same terms as the Senior Notes at such time as Alliance has a
sufficient number of authorized and unreserved shares of common stock to
accommodate such conversion.

         The Company further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders who held their Senior Notes through June 30, 2008 will now receive
payment sharing until 120% of the payment participation amounts have been
received.

         The Company was unable to complete a Qualified Financing by the
requisite dates. As a result, the Company is in default under the Senior Notes
in the aggregate principal and interest amount of approximately $11 million.
Alliance is continuing to seek additional financing that would qualify as a
Qualified Financing for the purpose of funding its support of Double-Crane's
development of OXYGENT in the PRC.

                                      -12-
<PAGE>

         The Senior Notes can be converted anytime prior to the maturity date.
During the six months ended December 31, 2008, holders of certain Senior Notes
converted an aggregate of approximately $266,000 in principal and approximately
$244,000 in accrued interest into an aggregate of 3,000,000 shares of our common
stock at a conversion price of $0.17 per share. During the six months ended
December 31, 2007, holders of certain Senior Notes converted an aggregate of
approximately $2.1 million in principal and approximately $108,000 in accrued
interest into an aggregate of 12,780,018 shares of our common stock at a
conversion price of $0.17 per share. Also during the six months ended December
31, 2007, we recorded a loss on modification of debt of $14,000 resulting from
the issuance of an additional note in connection with the 2007 Amendment. At
December 31, 2008, the principal and accrued interest balances approximate $8
million and $3 million, respectively.

         The discussion included in this report assumes that we will continue as
a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in Note 1 to the consolidated financial statements, we may lack
sufficient working capital to service our debts and to fund our continuing
operations through the fiscal year ending June 30, 2009, which raises
substantial doubt about our ability to continue as a going concern. As of
December 31, 2008, we are in default under the terms of the 2007 Amendment and
we owe the holders of our Senior Notes approximately $11 million in principal
and accrued interest. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment, and we are unable to
do so, the holders of our Senior Notes may be able to force our liquidation. In
the event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation.

INDEMNIFICATION OBLIGATIONS
---------------------------

         The Company has undertaken certain indemnification obligations pursuant
to which it may be required to make payments to an indemnified party in relation
to certain transactions. The Company has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of New York. In connection with its facility leases, the Company has
agreed to indemnify its lessors for certain claims arising from the use of the
facilities. In connection with certain of its debt, stock purchase and other
agreements, the Company has agreed to indemnify lenders, sellers and various
other parties for certain claims arising from the Company's breach of
representations, warranties and other provisions contained in the agreements.
The duration of certain of these indemnification obligations does not provide
for any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in the accompanying unaudited condensed consolidated balance sheets.

4.  RELATED PARTY TRANSACTION

         During the period ended December 31, 2008, the Company's Chief
Executive Officer advanced $90,000 to the Company (the "Advance"). The Company
is still negotiating the specific terms of the Advance, including the interest
rate and maturity date. The Company anticipates the Advance will be convertible
into shares of common stock under the same terms of the Senior Notes payable if
the Company completes a Qualified Financing, as discussed in Note 3.

5.  EQUITY

REVERSE STOCK SPLIT
-------------------

         On April 3, 2008, the Board adopted, and our shareholders approved at
the 2007 Annual Meeting on May 30, 2008, an amendment to our Certificate of
Incorporation, as amended (the "Certificate Amendment"), to effect a reverse
stock split (the "Reverse Stock Split"). The Certificate Amendment does not
reduce the authorized number of shares of common stock so that we will continue
to have an adequate number of shares available for future issuance, as discussed
below. The Certificate of Amendment will, subject to the discretion of the
Board, be filed with the Secretary of State of the State of New York as promptly
as practicable, provided that the Board does not anticipate directing the
Company to file the Certificate Amendment until such time as a Qualified
Financing takes place. The amendment and the proposed Reverse Stock Split will
become effective as of the date of such filing (the "Effective Date").

GENERAL

         The Company is presently authorized to issue 150,000,000 shares of
common stock, of which 63,216,247 shares are outstanding, no shares are held in
treasury and 73,403,945 shares are reserved for issuance at December 31 2008.
Upon the effectiveness of the Reverse Stock Split, the Company will have
150,000,000 shares of common stock authorized, of which, as of the Effective
Date, approximately 6,321,625 shares will be outstanding, and 7,340,395 shares
will be reserved for issuance.


                                      -13-
<PAGE>

REASONS FOR AND CONSEQUENCES OF THE REVERSE STOCK SPLIT

         The Company requires additional funding to continue its operations and
desires to issue new securities in a future private placement; however, it has
become clear to management that investors are unwilling to invest any new money
into the Company so long as its existing Senior Notes are outstanding.

         The Company has reached an agreement with substantially all of the
holders of the Senior Notes to convert the outstanding principal amount and
accrued but unpaid interest under the Senior Notes into common stock of the
Company in accordance with the terms of the Senior Notes if certain conditions
are met.

         To induce the holders of the Senior Notes to convert their Senior Notes
into common stock of the Company, the Company agreed to modify the existing
royalty and milestone sharing arrangements with the holders of the Senior Notes
as follows:

              o    The holders of the Senior Notes will be given the pro rata
                   right to receive 100% of all royalties received by the
                   Company from the sale of OXYGENT products up to the maximum
                   total payment sharing amount of $11.4 million (currently,
                   under our agreement with the holders of the Senior Notes, the
                   holders of the Senior Notes have the right to only receive
                   50% of such royalties up to the maximum payment amount); and

              o    The holders of the Senior Notes will also be given the pro
                   rata right to receive: (i) 100% of the milestone payment to
                   be paid to the Company by Double-Crane upon sFDA approval of
                   OXYGENT in the PRC (currently, under the Note Purchase
                   Agreement, the holders of the Senior Notes have the
                   contractual right to only receive 50% of such milestone
                   payment), and (ii) 50% of any other milestone payment
                   received from a third party based on the development of an
                   OXYGENT product, in each case subject to the total maximum
                   amount of payments of $11.4 million.

         At December 31, 2008, prior to the Reverse Stock Split taking effect,
the Senior Notes and accrued interest were convertible into 64,424,242 shares of
common stock at $0.17 per share.

         In order to allow for the conversion of all of the Senior Notes, and
the subsequent issuance of shares of common stock in connection with a potential
private placement (as discussed below), the Company must effect the Reverse
Stock Split for the purpose of increasing the authorized but unissued and
unreserved shares of common stock.

         The conversion of the Senior Notes is conditioned on the following: (i)
100% of the Senior Notes being received in escrow by the Company for conversion
and cancellation (unless this condition is waived by the Company); (ii) approval
of the Reverse Stock Split by the Company's shareholders (which was accomplished
at the 2007 Annual Meeting on May 30, 2008); (iii) filing of the Certificate
Amendment and acceptance of the same with the Secretary of State of the State of
New York; and (iv) receipt by the Company of at least $3 million in new
financing from investors (a "Qualified Financing"). We have not yet identified a
possible source of funds for a Qualified Financing. The Company has no
additional plan, commitment, arrangement, understanding or agreement, either
written or oral, to issue additional shares of common stock upon the
effectiveness of the Reverse Stock Split, other than for the conversion of the
existing Senior Notes and for the potential financing described above.

         The Reverse Stock Split may also result in an increase in the trading
price of our common stock and could therefore create greater investor interest
in our common stock and possibly enhance the marketability of our common stock
to the financial market. However, although the Reverse Stock Split may increase
the market price of our common stock, the actual effect of the Reverse Stock
Split on our market price cannot be predicted. The market price of our common
stock may not rise in proportion to the reduction in the number of shares
outstanding as a result of the Reverse Stock Split. Further, the Company does
not know if the Reverse Stock Split will lead to a sustained increase in the
market price of our common stock. The market price of our common stock could
also change as a result of other unrelated factors, including our operating
performance and other factors related to our business as well as general market
conditions.

PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT

         The following describes the effects of the Reverse Stock Split assuming
the Board directs management to complete the Reverse Stock Split.

                                      -14-
<PAGE>

         Based upon the 63,216,247 shares of common stock outstanding on
December 31, 2008, the proposed Reverse Stock Split would decrease the
outstanding shares of Common Stock by 90%, and thereafter 6,321,625 shares of
common stock would be outstanding. The proposed Reverse Stock Split will not
affect any common shareholder's proportionate equity interest in the Company,
subject to the provisions relating to the elimination of fractional shares as
described below.

         At December 31, 2008, there were outstanding options to purchase an
aggregate of 2,645,700 shares of common stock under the Company's stock option
plans (the "Plans") and an aggregate of 4,102,110 shares were available for
grant under two of the Plans. The Company has reserved 6,747,810 shares for
issuance upon the exercise of the granted options and upon exercise of options
that may be granted in the future. The Plans provide for automatic adjustment in
the event of a reverse stock split so that the amount of shares issuable upon
exercise of outstanding options, the number of shares available for grant and
the number of shares reserved for issuance will be reduced to one-tenth of the
amount issuable prior to the Effective Date, and the exercise prices of the
granted options would become ten times the present exercise prices.

         At December 31, 2008, there were outstanding warrants to purchase an
aggregate of 2,231,893 shares of common stock and 2,231,893 shares of common
stock reserved for issuance at such date for the warrants. The provisions of the
relevant instrument pursuant to which the warrants were issued provide for
automatic adjustment in the event of a reverse stock split so that the amount of
shares issuable upon exercise of the warrants will be reduced to one-tenth of
the amount issuable prior to the Effective Date, and the exercise price would
become ten times the present exercise price. Accordingly, 223,189 shares of
common stock will be reserved for issuance on the Effective Date for the
warrants.

         At December 31, 2008, the Company, in addition to options and warrants,
had outstanding $8 million principal amount of the Senior Notes and accrued
interest of $3 million on said notes. The Senior Notes and accrued interest are
convertible at any time, at the respective holders' option, into shares of
common stock at $0.17 per share, subject to adjustment in the case of a reverse
stock split. In accordance with the provisions of the relevant instruments
pursuant to which the Senior Notes were issued, the number of shares of common
stock into which they may be converted is 64,424,242, which amount will be
reduced to 6,442,425 shares of common stock as a result of the Reverse Stock
Split.

         The foregoing may be summarized as follows:

<TABLE>
<S>     <C>
                                                                       IF REVERSE STOCK SPLIT
   NUMBER OF SHARES OF COMMON STOCK        AS OF DECEMBER 31, 2008     IS EFFECTED *
   --------------------------------        -----------------------     -------------
   Authorized                              150,000,000                 150,000,000
   Issued and Outstanding**                63,216,247                  6,321,625
   Reserved for Issuance***                73,403,945                  7,340,395
   Available for Future Issuance           13,379,808                  136,337,980
   Par Value Per Share                     $0.01                       $0.01
</TABLE>
   ----------------
   *       Without giving effect to fractional shares.
   **      Includes 635,000 shares of common stock deemed outstanding due to the
   automatic conversion of the Company's Series F Preferred Stock that occurred
   in March 2004. The stock certificate representing these shares of common
   stock has not yet been issued.
   ***     Number of shares reserved for estimated issuance upon exercise of
   options, warrants and debt.

6.  SUBSEQUENT EVENT

         During January 2009, the Chief Executive Officer increased the Advance
to the Company by $10,000 for a total of $100,000 (see Note 4).


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

(References to years are to our fiscal years ended June 30.)

                                      -15-
<PAGE>

PLAN OF OPERATION

         Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and, as of
December 31, 2008, have an accumulated deficit of $500.4 million. We expect to
incur significant operating losses over at least the next few years as we
continue our research and product development efforts and attempt to
commercialize our products. The Company is continuing to seek additional
financing of approximately $3 million to fund its continuing operations through
June 2011. Because adequate funds have not been available to the Company in the
past, the Company has already delayed its OXYGENT development efforts and has
delayed, scaled back, and/or eliminated one or more of its other product
development programs (see Note 1 to the accompanying unaudited condensed
consolidated financial statements and the "Liquidity and Capital Resources"
section below).

         Our revenues from operations have come primarily from collaborations
with corporate partners, including research and development, milestone and
royalty payments. Our expenses have consisted primarily of research and
development costs and administrative costs. To date, our revenues from the sale
of products have not been significant. We believe our future operating results
may be subject to quarterly fluctuations due to a variety of factors, including
the timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

         The discussion included in this report assumes that we will continue as
a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in Note 1 to the condensed consolidated financial statements, we may
lack sufficient working capital to service our debts and to fund our continuing
operations through the fiscal year ending June 30, 2009, which raises
substantial doubt about our ability to continue as a going concern. As of
December 31, 2008, we are in default under the terms of the 2007 Amendment and
we owe the holders of our Senior Notes approximately $11 million in principal
and accrued interest. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment, and we are unable to
do so, the holders of our Senior Notes may be able to force our liquidation. In
the event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation.

FORWARD-LOOKING INFORMATION

         Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2009, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the inability to obtain adequate financing for the Company's
development efforts; the likelihood that our creditors will force our
liquidation; the inability to enter into collaborative relationships to further
develop, manufacture and commercialize the Company's products; changes in any
such relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process, including uncertainties associated with
FDA decisions and timing on product development or approval; and the
uncertainties associated with obtaining and enforcing patents important to the
Company's business; and possible competition from other products. Furthermore,
even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the
potential products will be found ineffective during clinical trials; failure to
receive necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties. The research, development and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the SEC from time to time, and you are encouraged to read the
section entitled "Risk Factors" included in the Company's most recently filed
Annual Report on Form 10-KSB filed with the SEC on October 2, 2008.

                                      -16-
<PAGE>

RESEARCH AND DEVELOPMENT

         For the six months ended December 31, 2008 and 2007, we incurred
research and development expenses of $92,000 and $260,000, respectively, for
OXYGENT, an intravascular oxygen carrier that we are developing to augment
oxygen delivery in surgical patients at risk of acute oxygen deficit. Research
and development costs to date for our oxygen-therapeutic product candidates,
including Oxygent, total approximately $161 million. While difficult to predict,
we estimate that the completion of clinical trials for OXYGENT will cost at
least an additional $70 million. We do not anticipate that OXYGENT will reach
the market for at least a few years, if at all, and, because of the numerous
risks and uncertainties associated with product development efforts, we are
unable to predict the extent of any future expenditures or when material net
cash inflows from OXYGENT may commence, if at all.

         In January 2007, the French Ethics Committee (IRB) and the French
Competent Authority (regulatory agency) granted approval to start the Phase 2b
clinical trial for OXYGENT to prevent postoperative ileus resulting from hypoxia
during major surgery trial. Subsequently in November 2007, Alliance suspended
the clinical trial due to lack of adequate funding.

         On February 6, 2007, we announced the manufacture and release for
shipment of OXYGENT for the clinical trials planned in France and the PRC.
Alliance successfully completed the contract manufacture of OXYGENT clinical
trial material. However, on March 15, 2007, we announced that, in accordance
with the current regulations of the sFDA, the supplies for an IND application
and clinical development must be manufactured in a facility in the PRC. As a
result, Alliance agreed to accelerate the manufacturing technology transfer to
Double-Crane, which originally was planned to occur when Phase 3 trials were
initiated in the PRC. This technology transfer is underway with Double-Crane
completing the manufacturing facility and purchasing the required equipment for
emulsion manufacture. Once clinical supplies are manufactured by Double-Crane,
Double-Crane has indicated that it will submit its IND application for
initiation of the agreed upon clinical development plan. Double-Crane will start
a Phase 1 safety trial in Chinese nationals immediately after the sFDA approves
the IND application.

         Double-Crane has considerable experience in manufacturing large-volume
parenteral and IV solutions and has expressed a desire to supply Alliance with
clinical and commercial supplies of OXYGENT from its facilities in the PRC.
Supply of OXYGENT to the U.S. would be contingent on Double-Crane's compliance
to cGMP and registration with the U.S. FDA.

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2008 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2007

         There was no revenue for the three months ended December 31, 2008, or
for the three months ended December 31, 2007.

         Research and development expenses increased by $11,000, or 13%, to
$102,000 for the three months ended December 31, 2008, compared to $91,000 for
the three months ended December 31, 2007. The increase in research and
development expenses was primarily due to an increase in patent expenses of
$40,000 in connection with filing a new patent in certain countries, partially
offset by decreases in all other research and development expenses.

         General and administrative expenses decreased by $16,000, or 8%, to
$178,000 for the three months ended December 31, 2008, compared to $194,000 for
the three months ended December 31, 2007. The decrease in general and
administrative expenses was primarily the result of a decrease in legal and
accounting fees.

         Investment income for the three months ended December 31, 2008 was
$1,000, compared to $4,000 for the three months ended December 31, 2007. The
decrease was primarily a result of a lower cash balance.

         Interest expense was $192,000 for the three months ended December 31,
2008, a decrease of 14% compared to $222,000 for the three months ended December
31, 2007. The decreased interest expense for the current quarter was primarily
the result of lower Senior Note principal balances because of conversions during
fiscal year 2008.


                                      -17-
<PAGE>

SIX MONTHS ENDED DECEMBER 31, 2008 AS COMPARED WITH SIX MONTHS ENDED DECEMBER
31, 2007

         There was no revenue for the six months ended December 31, 2008,
compared to $57,000 for the six months ended December 31, 2007. The revenue for
the prior period was composed of royalties received from sales other than
IMAGENT.

         Research and development expenses decreased by $168,000, or 64%, to
$92,000 for the six months ended December 31, 2008, compared to $260,000 for the
six months ended December 31, 2007. The decrease in research and development
expenses was primarily due to a decrease of $98,000 because of the discontinued
clinical trial in France, a refund of $18,000 in clinical trial insurance during
the current period, a decrease in contract manufacturing of OXYGENT clinical
trial material of $36,000, a decrease of $29,000 in research and development
personnel costs, a decrease in preclinical costs of $8,000 and a decrease of
$7,000 in archiving and storage costs, partially offset by an increase in patent
expenses of $28,000 related to a new patent.

         General and administrative expenses decreased by $122,000, or 25%, to
$369,000 for the six months ended December 31, 2008, compared to $491,000 for
the six months ended December 31, 2007. The decrease in general and
administrative expenses was primarily a decrease of $68,000 in legal and
accounting fees, a decrease of $29,000 in rent and other office-related
expenses, a decrease of $12,000 in personnel costs and a decrease of $13,000 in
travel expenses.

         For the six months ended December 31, 2008, we recorded a gain on the
sale of an asset of $25,000, which was primarily due to the agreement to
terminate all on-going obligations under previous agreements between the Company
and Imcor whereby both companies agreed that the continuing rights and
obligations of each company under the terms of the previous agreements were
terminated and were of no further force or effect. Imcor paid $25,000 to
Alliance in satisfaction of all of Imcor's obligations and liabilities under the
terms of the previous agreements. In return, Alliance released Imcor from all
liabilities, including future royalty payments, if any.

         For the six months ended December 31, 2008, we recorded a loss on
disposal of equipment of $17,000, which was primarily the gift of $31,000 of
equipment, less $14,000 of depreciation, to Double-Crane.

         For the six months ended December 31, 2007, we recorded a loss on
modification of debt of $14,000 resulting from the issuance of an additional
note in connection with the 2007 Amendment (see Note 3).

         Investment income decreased by $13,000 to $1,000 for the six months
ended December 31, 2008, compared to $14,000 for the six months ended December
31, 2007. The decrease was primarily a result of lower cash balances during the
current period.

         Other income was $25,000 for the six months ended December 31, 2008,
compared to $163,000 for the six months ended December 31, 2007, which were both
the result of proceeds recorded from the sale of raw material inventory (which
was previously written off).

         Interest expense was $397,000 for the six months ended December 31,
2007, compared to $465,000 for the six months ended December 31, 2006. The
decreased interest expense for the current period was the result of lower Senior
Note principal balances due to the conversion of certain principal amounts into
common stock.

LIQUIDITY AND CAPITAL RESOURCES

         Since inception, we have funded our operations primarily through the
sale of equity securities, payments under our collaboration agreements and debt
financing. From inception to December 31, 2008, we had received $243 million in
net proceeds from sales of our equity securities, $260.8 million in payments
from collaboration agreements and $74.3 million in debt financing of which $41
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock.


                                      -18-
<PAGE>

         At December 31, 2008, we had approximately $1,000 in cash compared to
$6,000 at June 30, 2008. The decrease resulted primarily from the net cash used
in operations of $95,000. At December 31, 2008, we had a working capital deficit
of $11.8 million, compared to a working capital deficit of $11.6 million at June
30, 2008. The deficit increase was principally due to a net decrease in prepaid
expenses and other current assets of $21,000, a net increase in accounts payable
and accrued expenses of $84,000, loans from an officer of $90,000, an increase
in deferred compensation of $165,000, an increase in the Senior Note accrued
interest of $397,000, partially offset by conversion of a Senior Note and
accrued interest of $510,000. Our operations to date have consumed substantial
amounts of cash and are expected to continue to do so for the foreseeable
future.

         Net cash used in operating activities totaled $95,000 for the six
months ended December 31, 2008, compared to net cash used of $737,000 for the
six months ended December 31, 2007. The decrease during the six months ended
December 31, 2008 was primarily due to a decrease in payments for research and
development activities, an increase in deferred compensation and loans received
from an officer.

         At December 31, 2008, the following approximate debt obligations were
outstanding:

         (a)  $333,000 owed to various vendors;
         (b)  $377,000 in accrued expenses, including $305,000 in deferred
compensation;
         (c)  $100,000 in deferred revenue;
         (d)  $90,000 of advances from an officer;
         (e)  $11 million in Senior Notes, including $3 million in accrued
interest;
         (f)  $750,000 in deferred royalty payments to be paid through future
IMAGENT earn-out payments, if any. In the event there are no future IMAGENT
earn-out payments, the deferred royalties will not be paid.

         Until we can generate significant continuing revenues, we expect to
satisfy our future cash needs through strategic collaborations, private or
public sales of our securities, debt financings or by licensing all or a portion
of our product candidates or technology. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all.

         We no longer have working capital to fund our operations; therefore, in
addition to seeking to complete a Qualified Financing, we are seeking additional
collaborative research and development relationships with suitable corporate
partners for our products. Because adequate funds have not been available to us
in the past, we have already delayed our OXYGENT development efforts and have
delayed, scaled back, and/or eliminated one or more of our other product
development programs.

         The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. We have incurred operating
losses through December 31, 2008. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. As of December
31, 2008, we are in default under the terms of the 2007 Amendment and we owe the
holders of our Senior Notes approximately $11 million in principal and accrued
interest. We currently do not have the resources to repay the Senior Notes. If
the holders of our Senior Notes demand repayment, and we are unable to do so,
the holders of our Senior Notes may be able to force our liquidation. In the
event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

WHERE YOU CAN FIND MORE INFORMATION

         We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and must file reports, proxy statements and
other information with the SEC. The reports, information statements and other
information we file with the Commission can be inspected and copied at the
Commission Public Reference Room, 100 F Street, N.E. Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at (800) SEC-0330. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy, information statements and
other information regarding registrants, like us, which file electronically with
the Commission.


                                      -19-
<PAGE>

         We were incorporated in New York in 1983. Our principal executive
offices are located at 7590 Fay Avenue, Suite 402, La Jolla, California 92037,
and our telephone number is (858) 410-5200.

         Our common stock is traded on the OTCBB under the symbol "ALLP.OB."

CRITICAL ACCOUNTING POLICIES

         There were no significant changes in critical accounting policies or
estimates from those at June 30, 2008.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

         As of December 31, 2008, we did not have any off-balance sheet
financing arrangements or any equity ownership interests in any variable
interest entity or other minority-owned ventures.

ITEM 4T. CONTROLS AND PROCEDURES

         (a) Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, our
CEO and CFO concluded that as of December 31, 2008 our disclosure controls and
procedures were effective at the reasonable assurance level in timely alerting
them to the material information relating to the Company (or the Company's
consolidated subsidiaries) required to be included in the Company's periodic
filings with the SEC, subject to the various limitations on effectiveness set
forth below under the heading, "Limitations on the Effectiveness of Internal
Controls," such that the information relating to the Company, required to be
disclosed in SEC reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to the Company's management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.

         (b) Changes in internal control over financial reporting. There has
been no change in the Company's internal control over financial reporting that
occurred during the three-month period ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS

         The Company's management, including our CEO and CFO, does not expect
that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.

PART II OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         During the quarter ended December 31, 2008, holders of certain Senior
Notes converted an aggregate of approximately $266,000 in principal and
approximately $244,000 in accrued interest into an aggregate of 3,000,000 shares
of our common stock at a conversion price of $0.17 per share.


                                      -20-
<PAGE>

         The offers and sales of these securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended, (the "Securities
Act") in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as transactions by us not involving a public offering.
The recipients of the securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to share certificates issued in such transactions. All recipients
had adequate access to information about us.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         The Company is currently in default with respect to the repayment of
all outstanding principal under the Senior Notes, totaling $8 million, and
accrued interest under the Senior Notes, totaling $3 million, at December 31,
2008.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

         (a)      Index to Exhibits

EXHIBIT       DESCRIPTION

     31.1     Certification of our Chief Executive Officer, pursuant to
              Securities Exchange Act Rule 13a-14(a) and 15d-14(a) as adopted
              pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     31.2     Certification of our Chief Financial Officer, pursuant to
              Securities Exchange Act Rule 13a-14(a) and 15d-14(a) as adopted
              pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     32.1     Certification of our Chief Executive Officer under Section 906 of
              the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

     32.2     Certification of our Chief Financial Officer under Section 906 of
              the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *
----------------

* Filed Herewith.

                                      -21-
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                   ALLIANCE PHARMACEUTICAL CORP.

                                   (Registrant)
Date:    February 16, 2009         By: /s/  Duane J. Roth
                                       -----------------------------------------
                                            Duane J. Roth
                                            Chairman and Chief Executive Officer


                                   By: /s/  Jack DeFranco
                                       -----------------------------------------
                                            Jack DeFranco
                                            Chief Operating Officer and Chief
                                            Financial Officer



                                      -22-